For the benefit of any reader who is unfamiliar with Dow Theory, and does not have access to the concise statement as listed by Dow’s successor at the Wall Street Journal, William Peter Hamilton, it is reproduced here.
William Hamilton was the fourth editor of the Wall Street Journal, writing some 252 editorials between 1903 and 1929, and the author of the book “The Stock Market Barometer” in which he presented his version of Dow Theory. There are three statements:
- “The averages discount everything. The averages represent all that is known and all that can be foreseen by financial and lay minds concerning financial matters. In effect, the averages accurately reflect the tapping of every source of important information that has any market significance.”
- “The averages consist of three price movements: the primary trend, secondary reactions, and daily fluctuations. Primary trends are known as bull or bear markets and can last less than a year to several years. Secondary reactions are the movements that run counter to the market’s primary trend and are often erroneously perceived as changes in the primary trend. Daily fluctuations, according to the Dow Theory, offer little in the way of forecasting power; inferences drawn from daily price movements will almost always be misleading.”
- “Both averages must confirm. This is perhaps the most important tenet of the Dow Theory. The movements of both the industrials and transports should always be considered together. Conclusions based on the movement of one average, unconfirmed by the other are likely to be misleading.”
The editorials of Charles Henry Dow have been the inspiration for other contemporaries and followers of Charles Dow including William Hamilton; they have become known collectively as Dow Theorists. Robert Rhea, E George Schaeffer, Richard Russell and Charles Carlson can be considered in this category. They have kept alive the relevance of Dow’s writings in changing market conditions during the 2oth century.
I have reservations about the first statement, expressed in an earlier post, considering that Hamilton’s statement does not truly reflect Dow’s view of the averages, and of market prices.